There is nothing exciting about Elanor Commercial Property Fund’s (ASX: ECF) recent share price movement, but financial data could add more to the story
Elanor Commercial Property Fund (ASX: ECF) shares have remained broadly stable over the past three months. Either way, it’s worth bringing the company together given that its financial KPIs look pretty strong and this is usually rewarded by the markets in the long run. In this article we have decided to focus on Elanor Commercial Real Estate Fund DEER.
Return on equity or ROE is an important factor for a shareholder to consider, as it tells them how effectively their capital is being reinvested. In other words, it reveals the company’s success in turning shareholders’ investments into profits.
How is the ROE calculated?
The return on equity formula is:
Return on equity = Net income (from continuing operations) ÷ Equity
Thus, based on the above formula, the ROE for Elanor Commercial Property Fund is:
13% = AU $ 31 million ÷ AU $ 243 million (based on the last twelve months to June 2021).
The “return” is the amount earned after tax over the past twelve months. One way to conceptualize this is that for every A $ 1 of shareholder capital it has, the company made A $ 0.13 in profit.
What does ROE have to do with profit growth?
So far, we’ve learned that ROE is a measure of a company’s profitability. Based on how much of those profits the company reinvests or “withholds” and its efficiency, we are then able to assess a company’s profit growth potential. Assuming everything else remains the same, the higher the ROE and profit retention, the higher the growth rate of a business compared to businesses that don’t necessarily have these characteristics.
Growth in profits of Elanor Commercial Property Fund and 13% of ROE
For starters, the ROE of Elanor Commercial Property Fund seems acceptable. Additionally, the company’s ROE is similar to the industry average of 13%. This probably explains in part the significant growth in the Elanor Commercial Property Fund’s net income of 53% over the past five years, among other factors. However, other drivers could also be behind this growth. For example, it is possible that the management of the company has made good strategic decisions or that the company has a low payout ratio.
Considering the fact that the industry’s profits fell 0.3% over the same period, the growth in the company’s net profit is quite remarkable.
Profit growth is an important metric to consider when valuing a stock. The investor should try to establish whether the expected growth or decline in earnings, as the case may be, is taken into account. In doing so, he’ll have an idea if the action is heading for clear blue waters or swampy waters ahead. Is the ECF just valued? This business intrinsic value infographic has everything you need to know.
Is Elanor Commercial Property Fund Efficiently Using Its Retained Earnings?
Elanor Commercial Property Fund has a very high three-year median payout ratio of 77%. This means that he only has 23% of his income left to reinvest in his business. However, it is not uncommon to see a REIT with such a high payout ratio mainly due to legal requirements. Despite this, the company was able to increase its profits significantly, as we saw above.
In addition to recording earnings growth, Elanor Commercial Property Fund has only recently started paying dividends. It is quite possible that the company is trying to impress its shareholders. Our latest analyst data shows that the company’s future payout ratio over the next three years is expected to be around 90%. Nonetheless, forecasts suggest that the future ROE of Elanor Commercial Property Fund will drop to 9.7%, although the company’s payout ratio is not expected to change much.
Overall, we think the performance of Elanor Commercial Property Fund has been quite good. Especially the high ROE, which contributed to the impressive growth in earnings. Although the company only reinvested a small portion of its profits, it still managed to increase its profits, which is appreciable. That said, the company’s earnings growth is expected to slow, as current analyst estimates predict. Are the expectations of these analysts based on general industry expectations or on company fundamentals? Click here to go to our business analyst forecasts page.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.